African escape: miners flee red tape

More policy risks are forcing emerging Australian mining companies to look abroad for new projects, challenging the nation’s long-established reputation as one of the world’s most stable mining destinations.

Risks associated with tax reform, infrastructure, energy and water ­security, carbon emissions policy, ­industrial relations and lengthy ­regulatory approval processes are ­beginning to outweigh the sovereign risk of starting new mining ventures in far less-developed nations. In the past three years Australian miners have invested more than $3 billion overseas, accelerating the pace of ­offshore investment relative to local spending. A push by goldminers into West Africa led the charge.

While the planned $50 billion in project spending this year in Australia suggests a booming local ­resources industry, this is being driven by the big players investing in gas and iron ore.

But for many smaller base and precious metal miners, the risks associated with investing in Australia, combined with a strong dollar and difficulty securing debt finance, are forcing them to look overseas where they can get more for their money.

“The difficulty of getting projects up and running in Australia now is immense compared with Africa, where they have more the attitude [that] Australia had in the 60s and 70s,"
Paladin Energy
founder and managing director
John Borshoff
said. “The level of intense red, black and green tape [in Australia] is beyond the bearable."

He said multibillion-dollar projects would proceed, but those in the $50 million to $100 million range faced a much tougher environment ­because the proponents did not have access to regulatory and environmental specialists needed to negotiate ­exhaustive local approval processes.

“If it takes five years to get a project up in an African country, it will take 10 years here," Mr Borshoff said.

Retiring BHP Billiton chairman
Don Argus
last week warned about the impact of policy and tax changes on investment decisions. His comments came as the federal government was contemplating a resources rent tax proposal, part of the Henry tax ­review, which could increase levies by 40 per cent.

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Earlier this month the acting chief executive of Australia’s second largest goldminer, Lihir Gold, told investors in London that the Ivory Coast and ­Papua New Guinea compared favourably with Australia as investment ­destinations.

Australia has been slipping down the rankings of attractive investment destinations in recent years, according to research by Canada’s renowned Fraser Institute. “Australia’s fall has not been huge and it does not affect all states; however, increased regulatory hurdles and taxes could speed the ­decline in future years," Fred McMahon, vice-president of research at the institute, told The Australian Financial Review.

All states except Victoria score higher on their mineral endowment than on their policy environment, ­according to the institute. Mineral-rich Western Australia is seventh in the world in terms of its natural resources, but 21st in terms of policy.

“It is one of the great myths of our time that we are so well endowed with natural resources that the money is ­going to flow anyway," Australian Minerals Council chief executive
Mitch Hooke
said.

“We do have a comparative advantage, but that does not necessarily equate to competitive strength. The ­issues that are the key determinants in terms of investments are where you sit in the cost curve and what are the risks."

Risk in Australia is determined by the policy environment, rather than traditional sovereign risk of developing nations around stability of the government or the legal framework.

A marked trend of recent years has been the rush into Africa of Australian goldminers that previously might have been found around Kalgoorlie.

“In the better African jurisdictions it is a lot easier to work and operate, and there is a recognition of the importance of mining in sustaining the national economy, which is not the case in Australia," says Bill Oliver, exploration director of
Signature Metals
.

“The proactive attitude of some ­African governments in trying to seek investments and their willingness to be practical when it comes to mining projects makes them more attractive destinations."

Signature is developing the Konongo gold project in Ghana and Mr Oliver noted a huge increase of interest from Australian miners and investors in West Africa. He said the number of Australian miners in the region was growing daily, as each heard from the success of their predecessors.

The more comfortable miners and investors get with Africa, the poorer Australia holds up to comparison.

“It’s much more difficult to actually get work done on the ground in Australia versus those African jurisdictions," said Mark Main, chief executive of
Peak Resources
, which has projects in Tanzania and Western Australia.

“That’s largely due to approval processes and clearances, some areas in Western Australia are easier than others, but you can get held up for years," Mr Main said.

It is now much simpler for miners to compare the relative risks and costs of various projects around the globe, so they are not limited to their local ­regions. The same can be said of investors in the mining sector.

“It’s an unfortunate risk that has risen for investors in the local sharemarket over the last three years – the uncertainty caused by the threat of government intervention and regulation," Perpetual portfolio manager Matt Williams says.

“I think that it is certainly in the short term going to give companies looking to invest pause for thought."

The Fraser figures are from last year and do not reflect recent uncertainty injected by a mooted 40 per cent resources rent tax proposed as part of the Henry tax review, and increased union activity in the sector since the introduction of the federal government’s Fair Work legislation.

These additional risks may well push Australia further down this year’s list, which is out next month.

While the headline figure of a 40 per cent resources tax in addition to corporations tax has sent shockwaves through the mining industry, it is the uncertainty that hangs over the sector that has really exercised many chief executives.

“The Henry tax review will hang over like a bad smell for years because no one will be able to make a decision because of the [federal] election and all of that delays the fiscal clarity that you need," Mr Borshoff said.

The lack of fiscal certainty also worries
OZ Minerals
managing director
Terry Burgess
, whose company has $1 billion in cash it is expected to spend on new developments or acquisitions.

“None of the details are available and it is unsettling and it is unnecessary in a country like Australia to have that sort of fiscal uncertainty," Mr Burgess said.

The move to a federal tax or royalty system would also remove an incentive for state governments to encourage major project developments in their ­region, according to
Macarthur Coal
chief executive
Nicole Hollows
.

“For equity markets, why would you want to invest in Australia? Queensland has already increased its royalties and so has NSW, and now [with the Henry review] no one knows what the royalty structure will be," Ms Hollows said.

Also, more regulatory delays and higher costs are making it extremely risky to invest in Australia, despite its natural abundance of minerals.

“We developed Copabella [coalmine] in 15 months in 1998. You couldn’t do the same project in less than five years now," Ms Hollows said.

Infrastructure bottlenecks are making matters even worse on the east coast. A recent review of the infrastructure in Queensland’s coal-rich Bowen Basin highlighted that rail constraints would persist for up to two years, according to Deutsche Bank analyst Brendan Fitzpatrick.

“Australia now really has to perform to get back to being a totally reliable supplier . . . it is starting to affect Australia’s credibility," Ms Hollows said. “So other countries are starting to come close [as investment destinations] and for us we would probably look at other countries now – whereas before we wouldn’t – because it is ­becoming a more even playing field."

It is not only that risks are perceived to be increasing in Australia. They are also seen to be decreasing in certain parts of Africa, as well as in South America, South-East Asia and the ­central Asian states.

“Australia is seen by some investors as presenting a higher risk than certain African nations . . . some Australian miners also share this view," says John Meyer, a London-based mining analyst at investment bank Fairfax IS.

“Botswana and Burkina Faso are popular destinations with mining ­investors and look likely to present more stable fiscal regimes." Ranked 18th in the world, Botswana scored higher than all Australian states save South Australia on the Fraser Institute’s policy attractiveness scale.

While the big projects provide the basis for another boom, many question the importance of the smaller miners, many of which are looking overseas. But it is the juniors that carry out much of the early-stage exploration that will form the basis of the next generation of projects for Australia’s resources industry.

“The big fright is that the very ­important part of the food chain, which is the exploration and the nursery companies, will go offshore ­because you get more bang for your buck out there," Mr Borshoff said.